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China's Secret Plan to save its Housing Market

China's Secret Plan to save its Housing Market

Spoiler alert: It involves the government scooping up homes.

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by Ludo Lugnani

In Short: China is contemplating a major initiative where local governments would purchase millions of unsold homes to rescue its struggling property market.

What's Going On?

China’s property market is in deep trouble, with home sales plunging by 47% in the first four months of the year and unsold housing inventory reaching an eight-year high. To tackle this, the Chinese government is considering a sweeping plan where local state-owned enterprises would buy up these unsold homes from distressed developers. These purchases would be financed by loans from state banks, and the properties could then be converted into affordable housing.

This isn’t China’s first attempt at such a solution. There have been smaller pilot programs before, but this new proposal would be on an unprecedented scale. The details are still under debate and might take months to finalize, but the plan reflects the urgency to address what is arguably the biggest challenge facing the world’s second-largest economy.

What Does This Mean?

If implemented, this plan could provide immediate relief to the property market by injecting much-needed liquidity into developers and reducing the excess housing inventory. According to Raymond Cheng of CGS International Securities, the proposal is a win-win: it supports developers, clears inventory, and boosts the economy. However, it comes with a hefty price tag—estimates suggest it could require at least 2 trillion yuan ($277 billion) to be effective.

For investors and the broader market, the news has already sparked some optimism. The CSI 300 Real Estate Index saw a 5% jump, and the offshore yuan and Australian dollar gained slightly after the announcement.

However, the potential pitfalls are significant. Local governments, already burdened with debt, might see their financial strains worsen. Banks, grappling with bad loans and narrowing margins, could also face added pressure. Additionally, even a large-scale purchase program might not fully stabilize the market unless the underlying supply-demand imbalance is addressed. China's housing inventory is vast, and closing this gap would require enormous resources and sustained efforts.

How does this impact Law Firms

Real Estate and Construction Law:

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by Ludo Lugnani

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